SandRidge Investors Win Injunction in Proxy Fight Case

March 8 (Bloomberg) -- SandRidge Energy Inc. investors
persuaded a judge to bar the energy company’s directors from
impeding their efforts to replace the board in a proxy fight,
according to court filings.

Delaware Chancery Court Judge Leo Strine in Wilmington
concluded today that SandRidge directors can’t seek to strong-arm shareholders into rejecting a slate of board candidates
backed by hedge fund TPG-Axon Capital Management LP and other
activist investors in a March 15 proxy contest. Officials of New
York-based TPG have been soliciting votes to oust the directors,
including Chief Executive Officer Tom Ward, since January.

SandRidge investors should have the “right to make a free,
uncoerced choice” about whether to replace all seven of the
company’s directors, Strine said in a 38-page decision.

TPG, SandRidge’s third-largest shareholder, and Mount
Kellett Capital Management LP have called on the oil and
natural-gas producer to bring in new directors and remove Ward
from his post as chairman because of the company’s poor
performance. The energy company’s shares have fallen 78 percent
since its 2007 initial public offering, according to data
compiled by Bloomberg.

Greg Dewey, a SandRidge spokesman, and Anton Nicholas, a
spokesman for TPG-Axon, didn’t immediately respond to voice
messages and e-mails seeking comment on the ruling.

No Pressure

TPG and Mount Kellett officials, owners of a combined 11
percent stake in SandRidge, want managers to cut overhead by
selling the company’s planes and reducing employee compensation.
They also want SandRidge to refocus its business on oil-drilling
projects.

The ruling reinforces the idea that shareholders shouldn’t
be pressured by either side in the proxy fight over the board,
said Jason Wangler, an analyst with Wunderlich Securities Inc.
in Houston.

“TPG is allowed to present the facts and SandRidge is
allowed to present the facts,” Wrangler said in a telephone
interview. “Outside of that, there should be nothing else.”

Jerald Kallick, a SandRidge shareholder, filed suit in
January arguing company officials wrongfully interfered with
TPG’s and Mount Kellett’s efforts to gather shareholder votes
and win a board majority.

Lawyers for Kallick and other shareholders said in court
filings that SandRidge directors are misusing provisions tucked
into lender agreements covering the company’s $4.3 billion in
debt that allow for payment on the notes to be accelerated.

Directors are pointing to the fact that the notes can be
called if TPG and Mount Kellett are successful in the proxy
contest to “coerce” investors into voting for the current
board, the shareholders contend. While the board has the power
to disable those provisions, it refuses to do so, the investors
said in court filings.

Manipulation Alleged

Kallick also is seeking to “de-stagger” elections for
board members. That would mean that all directors would come up
at the same time for a vote.

Directors’ decision to keep the accelerated-debt provisions
in place “is an effort to improperly manipulate the election,”
shareholders’ lawyers said in a Feb. 20 filing.

SandRidge’s attorneys counter that such change-of-control
provisions are routinely demanded by lenders in connection with
corporate debt and there are “substantial risks” involved in
disabling them.

Such a move could impair “the company’s ability to obtain
financing in the future,” SandRidge’s lawyers said in a March 6
filing.

In his ruling, Strine said directors’ refusal to deactivate
the debt-acceleration provisions violated their legal duties to
act in shareholders’ best interests.

‘Incremental Advantage’

“The incumbent board’s behavior is redolent more of the
pursuit of an incremental advantage in a close contest, where a
small margin may determine the outcome, than of any good-faith
concern for the company, its creditors or its stockholders,”
the judge wrote.

As part of the injunction, Strine ordered SandRidge
officials not to rely on so-called “consent revocations”
they’ve gathered as part of the proxy fight. Those revocations
provide support for incumbent directors.

Wunderlich’s Wangler said it’s unclear how Strine’s ruling
will affect the proxy contest. TPG-Axon needs 50 percent of
SandRidge’s shareholders to vote in its favor, which is a high
threshold, the analyst said. Any unvoted shares effectively are
counted as votes to keep the existing board.

“I still feel it’s going to be tough to get enough of an
uproar for enough shareholders to get up and vote,” he said.
Wangler rates Sandridge a hold and doesn’t own any of its
shares.

‘Close’ Contest

Mark Lebovitch, a New York-based lawyer for Kallick, said
in a phone interview that the ruling could play a major role in
“what has become a very close proxy contest.”

In his derivative suit, Kallick contends SandRidge’s board
has granted Ward lavish pay packages despite the company’s
performance. Directors have approved “more than $150 million in
compensation for Ward over the past five years,” the investor
said in his complaint.

Ward Scrutinized

The board also previously allowed Ward to acquire interests
in the company’s wells in return for contributing a share of the
drilling costs, according to the complaint. SandRidge later
ended that program.

The energy company has disclosed that it acquired working
interests in leases from WCT Resources LLC, which is owned by
trusts benefiting Ward’s children, according to filings with the
U.S. Securities and Exchange Commission.

In a Jan. 17 letter to the company, Mount Kellett officials
said SandRidge managers should hire outside lawyers to
investigate business transactions between Ward, his son, Trent
Ward, and the company.

SandRidge directors said Jan. 25 an internal review of the
company’s transactions with firms controlled by Ward and his
family “found no evidence of impropriety.”

SandRidge fell a penny to $5.81 in New York Stock Exchange
composite trading today.

SandRidge’s 8.125 percent bonds due in 2022 rose more than
1 percent to 108.75 cents on the dollar, according to Trace, the
bond-price reporting system of the Financial Industry Regulatory
Authority.